AUDIT ASSIGNMENT- M.COM PART II – SEMESTER IV, AUDIT REPORT, CARO 2015, AUDIT REPORT OF JINDAL STEEL & POWER LIMITED, SA 230 AUDIT DOCUMENTATION (REVISED), SA 500: AUDIT EVIDENCE.
Z Score,T Score, Percential Rank and Box Plot Graph
Audit assignment m.com part ii – semester iv
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AUDIT ASSIGNMENT- M.COM PART II – SEMESTER IV
Contents
AUDIT REPORT...............................................................................................................................2
WHAT IS AUDITING?..................................................................................................................2
WHAT IS AN AUDIT REPORT?....................................................................................................2
ELEMENTS OF AUDIT REPORT..................................................................................................3
CARO 2015 .......................................................................................................................................4
APPLICABILITY OF CARO:.........................................................................................................4
EXAMPLE : AUDIT REPORT OF JINDAL STEEL & POWER LIMITED.......................................8
CONCLUSION:...........................................................................................................................16
SA 230 Audit Documentation (Revised).............................................................................................17
SCOPE OF SA 230 – AUDIT DOCUMENTATION.......................................................................17
NATURE OF AUDIT DOCUMENTATION..................................................................................17
OBJECTIVE................................................................................................................................17
DEFINITIONS.............................................................................................................................18
REQUIREMENTS........................................................................................................................19
MATTERS ARISING AFTER THE DATE OF THE AUDITOR’S REPORT ..................................20
ASSEMBLY OF THE FINAL AUDIT FILE..................................................................................21
DOCUMENTATION OF THE AUDIT PROCEDURES PERFORMED & AUDIT EVIDENCE
OBTAINED.................................................................................................................................21
DOCUMENTATION – SA COMPLIANCE...................................................................................22
DOCUMENTATION OF SIGNIFICANT MATTERS & RELATED SIGNIFICANT
PROFESSIONAL MATTERS.......................................................................................................23
CONCLUSION............................................................................................................................24
SA 500: AUDIT EVIDENCE............................................................................................................25
OBJECTIVE of SA 500 ................................................................................................................25
DEFINITIONS.............................................................................................................................25
REQUIREMENTS........................................................................................................................26
SOURCES OF AUDIT EVIDENCE..............................................................................................27
AUDITPROCEDURES FOR OBTAININGAUDIT EVIDENCE...................................................28
INFORMATION TO BE USED AS AUDIT EVIDENCE...............................................................31
CONCLUSION............................................................................................................................32
REFERENCE:..................................................................................................................................32
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AUDIT REPORT
WHAT IS AUDITING?
Auditing is simply the process of evaluating a company’s internal functions for their
effectiveness and compliance, in an independent manner. It helps a business in understanding the
areas of improvement and analyze what’s working for them and what’s not. Auditing could be
internal or external in nature; when the auditors belong to the organization’s internal body say
for example, an audit committee of the board of directors, then the auditing is an internal one.
Whereas, when an external agency or a government body is involved in the auditing, then it’s
known as external auditing. The auditors must be allowed to conduct assessments independently
and given complete freedom to check the processes according to the given rules and regulations.
WHAT IS AN AUDIT REPORT?
An audit report basically summarizes the findings of the audit conducted, points out the issues
and suggests remedial actions, and also reflects the action plan suggested by the management of
the company. Audit reports are generally structured around the following five important
elements:
1. Condition: describes the problem in the process, found during the audit
2. Criteria: indicates the criteria that was not met (e.g. a quality standard, a company policy
document, accounting policies etc.)
3. Cause: reason for the problem in the process
4. Consequence: what can the problem lead to? (negative outcome/ risk)
5. Corrective Action: what can the management do to correct the problem? (And by
when?)
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Remember, the purpose of an audit is not a deliberate fault-finding but an efficient way to set
right the company processes if they are not being followed correctly. Audit reports must be taken
seriously by companies as they present them with opportunities for improvement. They are
essential tools that help a business in achieving its objectives and move towards continual
growth.
ELEMENTS OF AUDIT REPORT
The basic elements of an auditor’s standard report on a company’s financial audit are:
1. A title that includes the word ‘independent’
2. A statement that the financial statements identified in the report were audited
3. A statement that the financial statements are the responsibility of the company’s
management and that the auditor’s responsibility is to express an opinion on the
financial statements based on his or her audit
4. A statement that the audit was conducted in accordance with the generally accepted
auditing standards and an identification of the United States of America as the country
of origin of those standards.
5. A statement that those standards require that the auditor plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement
6. A statement that an audit includes-
i. Examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements
ii. Assessing the accounting principles used and significant estimates made by
management
iii. Evaluating the overall financial statement presentation
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7. A statement that the auditor believes that his or her audit provides a reasonable basis of
his or her opinion
8. An opinion as to whether the financial statements present fairly, in all material aspects,
the financial position of the company as of the balance sheet date and the results of its
operations and its cash flows for the period then ended in conformity with generally
accepted accounting principles.
9. The manual or printed signature of the auditor’s firm
10. The date of the audit report.
CARO 2015
APPLICABILITY OF CARO:
Central Government, after consultation with the ICAI, hereby makes the Companies
(Auditor’s Report) Order, 2015. Apply w.e.f. FY Starting 1st April, 2015.
Applicability - Every company including a foreign company u/s 2(42) of CA, 2013.
Non-Applicability –
(a) A Banking Company as defined in Section 5(c) of the Banking Regulation Act, 1949;
(b) An Insurance Company as defined under the Insurance Act, 1938;
(c) A company licensed to operate under Section 8 of the Companies Act;
(d) A One Person Company as defined u/s 2(62) of the Companies Act and a small company
as defined u/s 2(85) of the Companies Act; and
(e) A Private Limited Company with a
Paid up Capital and Reserves up to Rs. 50 Lakhs
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Loan Outstanding up to Rs. 25 Lakhs from any bank or financial institution
and Turnover up to Rs. 5 crores at any point of time during the financial year.
Auditor’s report to contain matters - Every report made by the auditor u/s 143 of the
Companies Act, on the accounts of every company examined by him to which this Order
applies for the FY w.e.f. 1st April, 2014, shall contain the matters as below.
Matters to be included in the auditor’s report -
(i) Fixed Assets – Maintenance + Physical Verification + Discrepancy
Maintenance of proper records showing full particulars, including quantitative details and
situation of fixed assets;
Physically verified by the management at reasonable intervals;
If any material discrepancies on verification then, properly dealt with in the books of
account;
(ii) Inventory – Maintenance + Physical Verification + Procedures + Discrepancy
Maintenance of proper records showing full particulars, including quantitative details;
Physical verification of inventory at reasonable intervals by the management;
Procedures of physical verification followed by the management reasonable and adequate
in relation to the size of the company and the nature of its business. If procedure
inadequate it should be reported;
If any material discrepancies on verification then, properly dealt with in the books of
account;
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(iii) Loans Given – Granted + Repayment + Recovery
Granted any loans, secured or unsecured to companies, firms or other parties covered in
the register maintained u/s 189 of the Companies Act;
Receipt of the Principal amount and Interest are also regular; and
If overdue amount is more than rupees one lakh, whether reasonable steps have been
taken by the company for recovery of the principal and interest;
(iv) Internal Control System – Adequate ICS + Weakness in ICS
Adequate internal control system(ICS) commensurate with the size of the company and
the nature of its business,
ICS for the purchase of inventory and fixed assets and for the sale of goods and services.
Report on continuing failure to correct major weaknesses in ICS.
(v) Accept Deposits- – RBI Directions Compliances + Order of CLB/NCTL/RBI/Court
Compliances
Accepted Deposits as per direction by RBI and u/s 73 to 76 or any other relevant
provisions of the Companies Act and the rules complied with;
If not complied, the nature of contraventions should be stated;
If an order has been passed by CLB or NCLT or RBI or any court or any other tribunal,
whether the same has been complied with or not?
(vi) Cost Records – Maintenance as specified by CG
Maintenance of cost records has been specified by the Central Government u/s 148(1) of
the Companies Act;
Whether such accounts and records have been made and maintained;
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(vii) Statutory Dues – Depositing Regularly + O/s 6 months reported + Amount & Forum
mentioned + Transfer to IEPF
Regular in depositing undisputed statutory dues including PF, ESI, income-tax, sales-tax,
wealth tax, service tax, duty of customs, duty of excise, value added tax, cess and any
other statutory dues with the appropriate authorities;
If the arrears of O/s statutory dues as at the last day of the FY concerned for a period of
more than six months from the date they became payable, shall be indicated;
In case dues of taxes or cess have not been deposited on account of any dispute - Amount
involved and the forum where dispute is pending shall be mentioned; (A mere
representation to the concerned Department shall not constitute a dispute)
Amount transferred to investor education and protection fund in accordance with the
relevant provisions of the Companies Act, and rules within time.
(viii) Accumulated Losses – Reg. 5 yrs Co. + Acc. Losses min. 50% of Net Worth + Cash
Losses in FY and Preceding FY
Company which has been registered for a period not less than five years - its accumulated
losses at the end of the FY are not less than 50% of its net worth; and Whether it has
incurred cash losses in such FY and in the immediately preceding FY;
(ix) Repayment Defaults – To Bank/FI/Debenture holders + Report-Period & Amount
Defaulted in repayment of dues to a financial institution or bank or debenture holders;
The period and amount of default to be reported.
(x) Guarantee Given – Loan taken by others + T&C are not prejudicial
Given any guarantee for loans taken by others from bank or financial institutions;
Terms and conditions are prejudicial to the interest of the company.
(xi) Term Loans – Applied for Purpose
Term loans were applied for the purpose for which the loans were obtained;
(xii) Fraud – On/By Company + Report-Nature & Amount
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Whether any fraud on or by the company has been noticed or reported during the year;
The nature and amount involved is to be indicated.
Reasons to be stated for unfavorable or qualified answers.-
Where, in the auditor’s report, the answer to any of the questions referred above is unfavorable
or qualified, the auditor’s report shall also state the reasons.
Where the auditor is unable to express any opinion in answer to a particular question, his report
shall indicate such fact together with the reasons why it is not possible for him to give an answer
to such question.
EXAMPLE: AUDIT REPORT OF JINDAL STEEL & POWER LIMITED
For the Financial Year Ending 31st March, 2015 Compiled by S.R.Batliboi & Co. LLP
(Chartered Accountants) Dated: 27th May, 2015
INDEPENDENT AUDITOR'S REPORT
TO THE MEMBERS OF JINDAL STEEL & POWER LIMITED
We have audited the accompanying financial statements of Jindal Steel & Power Limited ("the
Company"), which comprise the Balance Sheet as at 31 March 2015, the Statement of Profit and
Loss, the Cash Flow Statement for the year then ended, and a summary of the significant
accounting policies and other explanatory information.
Management's Responsibility for the Financial Statements
The Company's Board of Directors is responsible for the matters stated in Section 134(5) of the
Companies Act, 2013 ("the Act") with respect to the preparation of these financial statements
that give a true and fair view of the financial position, financial performance and cash flows of
the Company in accordance with the accounting principles generally accepted in India, including
the Accounting Standards specified under Section 133 of the Act, read with Rule 7 of the
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Companies (Accounts) Rules, 2014. This responsibility also includes maintenance of adequate
accounting records in accordance with the provisions of the Act for safeguarding of the assets of
the Company and for preventing and detecting frauds and other irregularities; selection and
application of appropriate accounting policies; making judgments and estimates that are
reasonable and prudent; and design, implementation and maintenance of adequate internal
financial controls, that were operating effectively for ensuring the accuracy and completeness of
the accounting records, relevant to the preparation and presentation of the financial statements
that give a true and fair view and are free from material misstatement, whether due to fraud or
error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
have taken into account the provisions of the Act, the accounting and auditing standards and
matters which are required to be included in the audit report under the provisions of the Act and
the Rules made there under. We conducted our audit in accordance with the Standards on
Auditing specified under Section 143(10) of the Act. Those Standards require that we comply
with ethical requirements and plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and the
disclosures in the financial statements. The procedures selected depend on the auditor's
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor considers
internal financial control relevant to the Company's preparation of the financial statements that
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give a true and fair view in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on whether the Company has in
place an adequate internal financial controls system over financial reporting and the operating
effectiveness of such controls.
Basis for Qualified Opinion
a) As based on the Order of Hon'ble Supreme Court of India, the Company is to pay an
additional levy of Rs.295 per metric ton on gross coal extracted from operational mines. Through
March 31, 2015, such levy on the gross extraction amounts to Rs.2,082.23 crore of which Rs.
1,989.83 crore has been paid under protest and Rs.38.86 crore has been accrued. Had the gross
levy been recorded, exceptional items and net loss before tax for the year ended March 31, 2015
would have been higher by Rs.1,274.46 crore.
b) The Company has not made adjustment in the net carrying value of investment made in
mining assets including land, infrastructure and clearance, etc., of Rs. 419.72 crore as at March
31, 2015, pending finalization of the compensation claim filed by the Company with the
Government authorities. We are unable to comment on the matter including any consequential
adjustments that may be required in this regard in these financial statements.
Qualified Opinion
In our opinion and to the best of our information and according to the explanations given to us
except for the effects of our observation stated in (a) above and possible effects of our
observations in (b) above, the aforesaid financial statements give the information required by the
Act in the manner so required and give a true and fair view in conformity with the accounting
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principles generally accepted in India, of the state of affairs of the Company as at 31 March
2015, and its loss and its cash flows for the year ended on that date.
Report on Other Legal and Regulatory Requirements
1. As required by the Companies (Auditor's Report) Order, 2015 ("the Order") issued by the
Central Government of India in terms of sub–section (11) of Section 143 of the Act, we give in
the Annexure a statement on the matters specified in paragraphs 3 and 4 of the Order.
2. As required by Section 143 (3) of the Act, we report that:
(a) We have sought and obtained all the information and explanations which to the best of our
knowledge and belief were necessary for the purposes of our audit.
(b) In our opinion, proper books of account as required by the law have been kept by the
Company so far as it appears from our examination of those books.
(c) The Balance Sheet, the Statement of Profit and Loss and the Cash Flow Statement dealt with
by this Report are in agreement with the books of account.
(d) Except for the effects of matter (a) and possible effect of matter (b) described in the Basis for
Qualified Opinion paragraph above, in our opinion, the aforesaid financial statements comply
with the Accounting Standards specified under Section 133 of the Act, read with Rule 7 of the
Companies (Accounts) Rules, 2014.
(e) The matters described in the Basis for Qualified opinion paragraph above, in our opinion,
may have an adverse effect on the functioning of the Company.
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(f) On the basis of the written representations received from the directors as on 31 March 2015
taken on record by the Board of Directors, none of the directors is disqualified as on 31 March
2015 from being appointed as a director in terms of Section 164 (2) of the Act.
(g) With respect to the other matters to be included in the Auditor's Report in accordance with
Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our
information and according to the explanations given to us:
i. The Company has disclosed the impact of pending litigations on its financial position in its
financial statements – Refer Note 29 to the financial statements;
ii. The Company did not have any long–term contracts including derivative contracts for
which there were any material foreseeable losses;
iii. There has been no delay in transferring amounts, required to be transferred, to the
Investor Education and Protection Fund by the Company.
Annexure referred to in paragraph under the heading "Report on Other Legal and
Regulatory requirements" of our report of even date
Re: Jindal Steel and Power Limited ('the Company')
(i) Fixed Assets
(a) The Company has maintained proper records showing full particulars, including quantitative
details and situation of fixed assets.
(b) All fixed assets have not been physically verified by the management during the year but
there is a regular programme of verification which, in our opinion, is reasonable having regard to
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the size of the Company and the nature of its assets. No material discrepancies were noticed on
such verification.
(ii) Inventories
(a) The inventory has been physically verified by the management during the year. In our
opinion, the frequency of verification is reasonable. Inventories lying with outside parties have
been confirmed for significant inventory balance as at the year end.
(b) The procedures of physical verification of inventory followed by the management are
reasonable and adequate in relation to the size of the Company and the nature of its business.
(c) The Company is maintaining proper records of inventory. Discrepancies noted on physical
verification of inventories were not material, and have been properly dealt with in the books of
account.
(iii) Loan Given
According to the information and explanations given to us, the Company has not granted any
loans, secured or unsecured to companies, firms or other parties covered in the register
maintained under Section 189 of the Companies Act, 2013. Accordingly, the provisions of clause
3(iii) (a) and (b) of the Order are not applicable to the Company and hence not commented upon.
(iv) Internal Control System
In our opinion and according to the information and explanations given to us, there is an
adequate internal control system commensurate with the size of the Company and the nature of
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its business, for the purchase of inventory and fixed assets and for the sale of goods and services.
During the course of our audit, we have not observed any major weakness or continuing failure
to correct any major weakness in the internal control system of the company in respect of these
areas.
(v) Accepted Deposits
The Company has not accepted any deposits from the public.
(vi) Cost Records
We have broadly reviewed the books of account maintained by the Company pursuant to the
rules made by the Central Government for the maintenance of cost records under section 148(1)
of the Companies Act, 2013, related to the manufacture/generation of Mineral Products, Iron &
Non alloy Steel, Power and other products, and are of the opinion that prima facie, the specified
accounts and records have been made and maintained. We have not, however, made a detailed
examination of the same.
(vii) Statutory Dues
(a) Undisputed statutory dues
(i) Undisputed statutory dues including provident fund, investor education and protection fund,
employees' state insurance, income–tax, sales–tax, wealth–tax, service tax, customs duty, excise
duty, cess and other material statutory dues have generally been regularly deposited with the
appropriate authorities.
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(ii) According to the information and explanations given to us, no undisputed amounts payable in
respect of provident fund, employees' state insurance, income–tax, sales–tax, wealth–tax, service
tax, duty of customs, duty of excise, value added taxes, cess and any other statutory dues were
outstanding, at the year end, for a period of more than six months from the date they became
payable.
(b) Disputed statutory dues
According to the records of the Company, the dues outstanding of income–tax, sales–tax,
wealth–tax, service tax, duty of customs, duty of excise, value added tax and cess on account of
any dispute, are pending at various forums including Income Tax Appellate Tribunal,
Commissioner of Income Tax (Appeals), Supreme Court, Odisha High Court, etc. under various
statue.
(c) According to the information and explanations given to us, the amount required to be
transferred to investor education and protection fund in accordance with the relevant provisions
of the Companies Act, 1956 (1 of 1956) and rules made thereunder has been transferred to such
fund within time.
viii) Accumulated Losses
The Company has no accumulated losses at the end of the financial year. It has incurred cash
losses in the current year after considering the effect of matter stated in paragraph (a) of 'Basis
for qualified Opinion' of our auditor's report and the Company has not incurred cash losses in the
immediately preceding financial year.
(ix) Repayment Defaults
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Based on our audit procedures and as per the information and explanations given by the
management, we are of the opinion that the Company has not defaulted in repayment of dues to a
financial institution, bank or debenture holders.
(x) Guarantee Given
According to the information and explanations given to us, the Company has given guarantee for
loans taken by others from banks/ financial institutions, the terms and conditions whereof, in our
opinion, are not prima–facie prejudicial to the interest of the Company.
(xi) Term Loans
Based on the information and explanations given to us by the management, term loans taken
during the current year were applied for the purpose for which the loans were obtained.
(xii) Fraud
Based upon the audit procedures performed for the purpose of reporting the true and fair view of
the financial statements and as per the information and explanations given by the management,
we report that no fraud on or by the Company has been noticed or reported during the year.
CONCLUSION:
To conclude, audit reports vary based on the kind of audit, the processes involved and objectives
of the audit itself. If you are the owner of an audit firm or run a business, it’s essential for you to
understand the importance of a good auditing system, the best practices in the industry and the
motivation to achieve overall business excellence.
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SA 230 AUDIT DOCUMENTATION (REVISED)
SCOPE OF SA 230 – AUDIT DOCUMENTATION
This SA is effective for audits of financial statements for periods beginning on or after April 1,
2009. This Standard on Auditing (SA) deals with the auditor’s responsibility to prepare audit
documentation for an audit of financial statements. It is to be adapted as necessary in the
circumstances when applied to audits of other historical financial information. The specific
documentation requirements of other SAs do not limit the application of this SA. Laws or
regulations may establish additional documentation requirements.
NATURE OF AUDIT DOCUMENTATION
Audit documentation that meets the requirements of this SA and the specific documentation
requirements of other relevant SAs provides:
(a) Evidence of the auditor’s basis for a conclusion about the achievement of the overall
objectives of the auditor;
(b) Evidence that the audit was planned and performed in accordance with SAs and applicable
legal and regulatory requirements.
OBJECTIVE
The objective of the auditor is to prepare documentation of Audit that provides :
(a) A sufficiency and appropriateness of the audit record of the basis for the auditor’s report; and
(b) Evidence that the audit was planned and performed in accordance with SAs and applicable
legal and regulatory requirements.
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Other purposes served by audit documentation are to: assist in the effective supervision of audit
work by supervisors responsible for directing audit staff enable audit staff to be accountable for
the audit work they carry out ensure that a record of matters of significance to future audits is
retained help facilitate quality control reviews and inspections for audit work help facilitate the
inspection of audit work in accordance with applicable legal and regulatory requirements.
DEFINITIONS
For purposes of the SAs, the following terms have the meanings attributed below:
(a) Audit documentation –
The record of audit procedures performed, relevant audit evidence obtained, and conclusions the
auditor reached (terms such as “working papers” or “workpapers” are also sometimes used).
(b) Audit file –
One or more folders or other storage media, in physical or electronic form, containing the
records that comprise the audit documentation for a specific engagement.
(c) Experienced auditor –
An individual (whether internal or external to the firm) who has practical audit experience, and a
reasonable understanding of:
(i) Audit processes;
(ii) SAs and applicable legal and regulatory requirements;
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(iii) The business environment in which the entity operates; and
(iv) Auditing and financial reporting issues relevant to the entity’s industry.
REQUIREMENTS
1. Timely Preparation of Audit Documentation
The auditor shall prepare audit documentation on a timely basis.
2. Documentation of the Audit Procedures Performed and Audit Evidence Obtained
3. Form, Content and Extent of Audit Documentation
The auditor shall prepare audit documentation that is sufficient to enable an experienced
auditor, having no previous connection with the audit, to understand:
(a) The nature, timing, and extent of the audit procedures performed to comply with the
SAs and applicable legal and regulatory requirements;
(b) The results of the audit procedures performed, and the audit evidence obtained; and
(c) Significant matters arising during the audit, the conclusions reached thereon, and
significant professional judgments made in reaching those conclusions.
4. In documenting the nature, timing and extent of audit procedures performed, the
auditor shall record:
(a) The identifying characteristics of the specific items or matters tested;
(b) Who performed the audit work and the date such work was completed; and
(c) Who reviewed the audit work performed and the date and extent of such review.
5. The auditor shall document discussions of significant matters with management, those
charged with governance, and others, including the nature of the significant matters
discussed and when and with whom the discussions took place.
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6. If the auditor identified information that is inconsistent with the auditor’s final
conclusion regarding a significant matter, the auditor shall document how the auditor
addressed the inconsistency.
MATTERS ARISING AFTER THE DATE OF THE AUDITOR’S REPORT
If, in exceptional circumstances, the auditor performs new or additional audit procedures or
draws new conclusions after the date of the auditor’s report, the auditor shall document:
(a) The circumstances encountered;
(b) The new or additional audit procedures performed, audit evidence obtained, and conclusions
reached, and their effect on the auditor’s report; and
(c) When and by whom the resulting changes to audit documentation were made and reviewed.
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ASSEMBLY OF THE FINAL AUDIT FILE
The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file on a timely basis after the date of the
auditor’s report.
After the assembly of the final audit file has been completed, the auditor shall not delete or
discard audit documentation of any nature before the end of its retention period.
DOCUMENTATION OF THE AUDIT PROCEDURES PERFORMED & AUDIT
EVIDENCE OBTAINED
The form, content and extent of audit documentation depend on factors such as:-
The size and complexity of the entity.
The nature of the audit procedures to be performed.
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The identified risks of material misstatement.
The significance of the audit evidence obtained.
The nature and extent of exceptions identified.
The need to document a conclusion or the basis for a conclusion not readily determinable
from the documentation of the work performed or audit evidence obtained.
The audit methodology and tools used.
Audit documentation may be recorded on paper or on electronic or other media. Examples of
audit documentation include:-
Audit programmes.
Analyses.
Issues memoranda.
Summaries of significant matters.
Letters of confirmation and representation.
Checklists.
Correspondence (including e-mail) concerning significant matters.
Oral explanations by the auditor, on their own, do not represent adequate support for the work
auditor performed or conclusions the auditor reached, but may be used to explain or clarify
information contained in the audit documentation.
DOCUMENTATION – SA COMPLIANCE
In principle, compliance with the requirements of this SA will result in the audit documentation
being sufficient and appropriate in the circumstances. Other SAs contain specific documentation
requirements that are intended to clarify the application of this SA in the particular circumstances
of those SAs. The specific documentation requirements of other SAs do not limit the application
of this SA. Furthermore, the absence of a documentation requirement in any particular SA is not
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intended to suggest that there is no documentation that will be prepared as a result of complying
with that SA.
DOCUMENTATION OF SIGNIFICANT MATTERS & RELATED
SIGNIFICANT PROFESSIONAL MATTERS
Judging the significance of a matter requires an objective analysis of the facts and circumstances.
Examples of significant matters include:-
1. Matters that give rise to significant risks (as defined in SA 315).
2. Results of audit procedures indicating:-
a) that the financial statements could be materially misstated, or
b) a need to revise the auditor’s previous assessment of the risks of material
misstatement and the auditor’s responses to those risks.
3. Circumstances that cause the auditor significant difficulty in applying necessary audit
procedures.
4. Findings that could result in a modification to the audit opinion or the inclusion of an
Emphasis of Matter paragraph in the auditor’s report.
Some examples of circumstances in which it is appropriate to prepare audit documentation
relating to the use of professional judgment include, where the matters and judgments are
significant:-
1. The rationale for the auditor’s conclusion when a requirement provides that the auditor „shall
consider‟ certain information or factors, and that consideration is significant in the context of
the particular engagement.
2. The basis for the auditor’s conclusion on the reasonableness of areas of subjective judgments.
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3. The basis for the auditor’s conclusions about the authenticity of a document when further
investigation (such as making appropriate use of an expert or of confirmation procedures) is
undertaken in response to conditions identified during the audit that caused the auditor to
believe that the document may not be authentic.
The auditor may consider it helpful to prepare and retain as part of the audit documentation a
summary (sometimes known as a completion memorandum) that describes the significant
matters identified during the audit and how they were addressed, or that includes cross-
references to other relevant supporting audit documentation that provides such information. Such
a summary may facilitate effective and efficient reviews and inspections of the audit
documentation, particularly for large and complex audits.
CONCLUSION
When assessing how important it is for an audit firm to maintain adequate documentation for all
audit engagements, students should focus on the extent to which an audit firm relies on working
papers prepared. This reliance is not limited to the importance placed on them in allowing the
audit firm to arrive at a conclusion about the truth and fairness of financial statements – it
extends as well to reliance on the fact that they have been prepared in a professional manner to
defend any subsequent allegations that the audit firm has acted negligibly in the event of an
alleged audit failure.
By following the procedures and guidance set out in SA 230, audit firms should be assured that
audit documentation has been prepared in a professional manner.
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SA 500:AUDIT EVIDENCE
This SA is effective for audits of financial statements for periods beginning on or after April 1,
2009. This Standard on Auditing (SA) explains what constitutes audit evidence in an audit of
financial statements, and deals with the auditor’s responsibility to design and perform audit
procedures to obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the auditor’s opinion. This SA is applicable to all the audit
evidence obtained during the course of the audit.
OBJECTIVE of SA 500
The objective of the auditor is to design and perform audit procedures in such a way as to enable
the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the auditor’s opinion.
DEFINITIONS
For purposes of the SAs, the following terms have the meanings attributed below:-
Accounting Records:- The records of initial accounting entries and supporting records, such as
checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary
ledgers, journal entries and other adjustments to the financial statements that are not reflected in
journal entries; and records such as work sheets and spreadsheets supporting cost allocations,
computations, reconciliations and disclosures.
Appropriateness of Audit Evidence:-
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The measure of the quality of audit evidence; that is, its relevance and its reliability in providing
support for the conclusions on which the auditor’s opinion is based.
Audit Evidence:- Information used by the auditor in arriving at the conclusions on which the
auditor’s opinion is based. Audit evidence includes both information contained in the accounting
records underlying the financial statements and other information.
Management’s Expert:- An individual or organization possessing expertise in a field other than
accounting or auditing, whose work in that field is used by the entity to assist the entity in
preparing the financial statements.
Sufficiency of Audit Evidence:- The measure of the quantity of audit evidence. The quantity of
the audit evidence needed is affected by the auditor’s assessment of the risks of material
misstatement and also by the quality of such audit evidence.
REQUIREMENTS
1. Sufficient Appropriate Audit Evidence:- The auditor shall design and perform audit
procedures that are appropriate in the circumstances for the purpose of obtaining sufficient
appropriate audit evidence.
2. Information to be Used as Audit Evidence:- When designing and performing audit procedures,
the auditor shall consider the relevance and reliability of the information to be used as audit
evidence. When using information produced by the entity, the auditor shall evaluate whether the
information is sufficiently reliable for the auditor’s purposes, including as necessary in the
circumstances:-
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a) Obtaining audit evidence about the accuracy and completeness of the information; and
b) Evaluating whether the information is sufficiently precise and detailed for the auditor’s
purposes.
Selecting Items for Testing to Obtain Audit Evidence:- When designing tests of controls and
tests of details, the auditor shall determine means of selecting items for testing that are effective
in meeting the purpose of the audit procedure.
Inconsistency in, or Doubts over Reliability of, Audit Evidence:- If:-
a) audit evidence obtained from one source is inconsistent with that obtained from another; or
b) the auditor has doubts over the reliability of information to be used as audit evidence,
The auditor shall determine what modifications or additions to audit procedures are necessary to
resolve the matter, and shall consider the effect of the matter, if any, on other aspects of the
audit.
SOURCES OF AUDIT EVIDENCE
Some audit evidence is obtained by performing audit procedures to test the accounting records,
for example, through analysis and review, re-performing procedures followed in the financial
reporting process, and reconciling related types and applications of the same information.
Through the performance of such audit procedures, the auditor may determine that the
accounting records are internally consistent and agree to the financial statements.
More assurance is ordinarily obtained from consistent audit evidence obtained from different
sources or of a different nature than from items of audit evidence considered individually. For
example, corroborating information obtained from a source independent of the entity may
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increase the assurance the auditor obtains from audit evidence that is generated internally, such
as evidence existing within the accounting records, minutes of meetings, or a management
representation.
AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE
As required by, and explained further in, SA 315 and SA 330, audit evidence to draw reasonable
conclusions on which to base the auditor’s opinion is obtained by performing:-
a) Risk assessment procedures; and
b) Further audit procedures, which comprise:-
Tests of controls, when required by the SAs or when the auditor has chosen to do so; and
Substantive procedures, including tests of details and substantive analytical procedures.
The nature and timing of the audit procedures to be used may be affected by the fact that some of
the accounting data and other information may be available only in electronic form or only at
certain points or periods in time. For example, source documents, such as purchase orders and
invoices, may exist only in electronic form when an entity uses electronic commerce, or may be
discarded after scanning when an entity uses image processing systems to facilitate storage and
reference.
INSPECTION:- Inspection involves examining records or documents, whether internal or
external, in paper form, electronic form, or other media, or a physical examination of an asset.
Inspection of records and documents provides audit evidence of varying degrees of reliability,
depending on their nature and source and, in the case of internal records and documents, on the
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effectiveness of the controls over their production. An example of inspection used as a test of
controls is inspection of records for evidence of authorisation.
Some documents represent direct audit evidence of the existence of an asset, for example, a
document constituting a financial instrument such as a stock or bond. Inspection of such
documents may not necessarily provide audit evidence about ownership or value. In addition,
inspecting an executed contract may provide audit evidence relevant to the entity’s application of
accounting policies, such as revenue recognition.
Inspection of tangible assets may provide reliable audit evidence with respect to their existence,
but not necessarily about the entity’s rights and obligations or the valuation of the assets.
Inspection of individual inventory items may accompany the observation of inventory counting.
OBSERVATION:- Observation consists of looking at a process or procedure being performed by
others, for example, the auditor’s observation of inventory counting by the entity’s personnel, or
of the performance of control activities. Observation provides audit evidence about the
performance of a process or procedure, but is limited to the point in time at which the
observation takes place, and by the fact that the act of being observed may affect how the process
or procedure is performed. You may refer to SA 501 for further guidance on observation of the
counting of inventory.
EXTERNAL CONFIRMATION:- An external confirmation represents audit evidence obtained
by the auditor as a direct written response to the auditor from a third party (the confirming party),
in paper form, or by electronic or other medium. External confirmation procedures frequently are
relevant when addressing assertions associated with certain account balances and their elements.
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However, external confirmations need not be restricted to account balances only. For example,
the auditor may request confirmation of the terms of agreements or transactions an entity has
with third parties; the confirmation request may be designed to ask if any modifications have
been made to the agreement and, if so, what the relevant details are. External confirmation
procedures also are used to obtain audit evidence about the absence of certain conditions, for
example, the absence of a “side agreement” that may influence revenue recognition. You may
refer to SA 505 for further guidance.
RECALCULATION:- Recalculation consists of checking the mathematical accuracy of
documents or records. Recalculation may be performed manually or electronically.
REPERFORMANCE:- Re-performance involves the auditor’s independent execution of
procedures or controls that were originally performed as part of the entity’s internal control.
ANALYTICAL PROCEDURE:- Analytical procedures consist of evaluations of financial
information made by a study of plausible relationships among both financial and non-financial
data. Analytical procedures also encompass the investigation of identified fluctuations and
relationships that are inconsistent with other relevant information or deviate significantly from
predicted amounts. You may refer to SA 520 for further guidance.
INQUIRY:- Inquiry consists of seeking information of knowledgeable persons, both financial
and non- financial, within the entity or outside the entity. Inquiry is used extensively throughout
the audit in addition to other audit procedures. Inquiries may range from formal written inquiries
to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry
process.
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Responses to inquiries may provide the auditor with information not previously possessed or
with corroborative audit evidence. Alternatively, responses might provide information that
differs significantly from other information that the auditor has obtained, for example,
information regarding the possibility of management override of controls. In some cases,
responses to inquiries provide a basis for the auditor to modify or perform additional audit
procedures.
INFORMATION TO BE USED AS AUDIT EVIDENCE
While audit evidence is primarily obtained from audit procedures performed during the course of
the audit, it may also include information obtained from other sources such as, for example,
previous audits, in certain circumstances, and a firm‟s quality control procedures for client
acceptance and continuance. The quality of all audit evidence is affected by the relevance and
reliability of the information upon which it is based.
RELEVANCE:- Relevance deals with the logical connection with, or bearing upon, the purpose
of the audit procedure and, where appropriate, the assertion under consideration. The relevance
of information to be used as audit evidence may be affected by the direction of testing. For
example, if the purpose of an audit procedure is to test for overstatement in the existence or
valuation of accounts payable, testing the recorded accounts payable may be a relevant audit
procedure. On the other hand, when testing for understatement in the existence or valuation of
accounts payable, testing the recorded accounts payable would not be relevant, but testing such
information as subsequent disbursements, unpaid invoices, suppliers‟ statements, and unmatched
receiving reports may be relevant.
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Substantive procedures are designed to detect material misstatements at the assertion level. They
comprise tests of details and substantive analytical procedures. Designing substantive procedures
includes identifying conditions relevant to the purpose of the test that constitute a misstatement
in the relevant assertion.
RELIABILITY:- The reliability of information to be used as audit evidence, and therefore of the
audit evidence itself, is influenced by its source and its nature, and the circumstances under
which it is obtained, including the controls over its preparation and maintenance where relevant.
For example, information obtained from an independent external source may not be reliable if
the source is not knowledgeable, or a management’s expert may lack objectivity.
CONCLUSION
SA 520 provides further guidance regarding the reliability of data used for purposes of designing
analytical procedures as substantive procedures.SA 240 deals with circumstances where the
auditor has reason to believe that a document may not be authentic, or may have been modified
without that modification having been disclosed to the auditor.
REFERENCE:
Advanced Auditing Mcom Part II – Manan Prakashan
GUIDANCE NOTES ISSUED by ICAI
http://profit.ndtv.com/stock/jindal-steel-&-power-ltd_jindalstel/reports-auditor-report
www.icai.org